Cost Inflation: Are Doctors The Problem?

Philip Betbeze, Senior Editor-Finance , September 17, 2007

Do American doctors make too much money? Probably, according to an insightful New York Times article.

The difference in physician compensation between the U.S. and Europe is staggering, outweighing even the most frequently cited villain in healthcare cost inflation, prescription drugs, which cost 30 percent to 50 percent more in the U.S. than in Europe. Average salaries for physicians in the U.S. range between $200,000 and $300,000 a year, while European doctors are paid between $60,000 and $120,000 a year. Meanwhile, the disparity between what primary-care physicians earn and what specialists earn is growing ever larger.

Is physician compensation the only reason healthcare cost inflation outgrew the economy for the umpteenth year running? No, but it's a big piece. The reasons healthcare costs in this country are growing faster than the economy are both simple and complex.

Here's the simple:

  • Specialty physicians are paid dramatically more than family practitioners.
  • Specialty physicians are paid best for ordering expensive treatments on their patients.
  • No physician is paid particularly well, if at all, for offering advice or routine examinations. When's the last time your physician office called you and told you it was time to come in for a physical?
Here's the complex:
  • Doctors, by and large, are responsible for paying huge malpractice insurance premiums.
  • Physicians go to school in a high-stress environment for years making nothing, and in most cases work several more years making very little, all the while racking up significant debt.
  • Like so many of us, doctors play the hand that's dealt them. The system pays them for procedures and interventions, so that's the way they practice medicine.

So the bottom line is that doctors are not the villains of our system. On the whole, they're just acting upon the incentives that are placed before them. The real culprit is how we pay them. Pay-for-performance measures enacted by private insurers, and even by Medicare recently, could be a good first step toward evaluating a doctor's performance and paying him or her more based on how healthy their patients are. But implementation of such plans has been complicated, heavy-handed, and has placed heavy administrative burdens on physician offices and hospitals for tracking data that may be considered important by one payer and unimportant by another. Add to this the fact that many health plans, even nonprofit ones, are trying to maximize their own margin, and you have doctors who are rightly suspicious that such ideas aren't built with the foundation of improving a patient's health, but rather with the payer's best interests, in mind.

A letter from a reader last week unintentionally confirmed that physicians respond to such measures like a balloon. Squeeze one end and the other gets bigger. Squeeze them on physician fees and they make it back on self-referral on things like imaging. He accused me and others of not understanding this concept: An orthopedic surgeon who has become accustomed to making $700,000 a year "now sees his income eroded, for no apparent reason, to $500,000." We understand, Howard, we just don't know what to do about it! And how much is enough? But anyone who thinks this theoretical self-interested physician will automatically cut back his supplemental income if physician fees were restored to 1987 levels is fooling himself. He'll no more junk his MRI machine than Bob Nardelli, who botched the CEO job at Home Depot, will give back his stock options.

The point is that the rate of healthcare inflation is unsustainable. What's the breaking point? Nobody knows. But if your nation's economy is growing at 3 percent and healthcare costs are growing at 7 percent, it doesn't take long statistically before the economic model breaks down catastrophically, leaving us with a genuine crisis.

And nobody wants to see what happens then.

Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at

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